Another good stretchEven after a good run for Malaysian rubber glove stocks over the past 12 months, we think valuations are far from stretched, at FY11F P/Es of 7.8-11.6x, or 20-46% below the market’s P/E of 14.5x. While most companies should see a breather after 40-50% EPS growth in 2009 spurred by pandemic fears, we expect a leg-up in structural demand growth, fuelled by recovery in the global economy, to support 9-26% EPS CAGRs over the next three years. For this growth story, P/Es of 7.8-11.6x for FY11F look compelling against the Malaysian market and other companies on Nomura’s BUY list. Malaysian players control 60-65% of global capacity and we see three- to fivemonth backlogs and high latex prices driving higher ASPs in 2010F. Sizeable long-term potential exists in the largely untapped Asian markets, which make up just 6-10% of global sales, while concerns on potential industry overcapacity in 2011F seem premature given the global economic recovery and potential restrictions in natural gas supply. We initiate coverage on Top Glove, Kossan and Supermax, the three largest listed glove makers in the world, with BUY ratings. Our top pick is Top Glove, whose diversified global customer base should support stable margins and for which we forecast a three-year EPS CAGR of 25.7%, implying an FY11F P/E of 11.6x.

Stocks for actionOur top pick is Top Glove given its consistent track record in delivering growth and continued market leadership. We are also positive across the sector. Price Price target Rating (RM) (RM) BUY* 11.98 BUY* BUY* 6.16 7.38 15.16 8.74 9.51

A strong year ahead Too early to worry about industry glut Malaysia — the largest glove producer in the world P/Es still low for growth, Top Glove is our top pick Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 48 to 52. Nomura 10 March 2010

Action Despite soaring an average of 300% (vs the market’s 48% rise), leading rubber glove stocks still imply 25-40% upside, in our view. The risks of overcapacity and margin squeeze are unlikely to unfold in the next 12 months. Attractive valuations of up to a 46% discount to market P/E, coupled with strong earnings growth prospects over the next four quarters, support our investment calls. Catalysts Latent demand from China, India and possible US healthcare reform remain potential re-rating catalysts. Anchor Themes With no imminent risks, the glove sector looks set to benefit from another year of strong growth. Companies with exposure to faster-growing markets, diversified revenue bases and efficient cost structures are our top picks.

Stocks for action
Our top pick is Top Glove, given its consistent track record in delivering growth and market leadership. We are also positive across the sector.

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